CLH

Clean Harbors, Inc. 10-Q Summary (Period Ended June 30, 2006)

Business Context and Reporting Period

Clean Harbors, Inc. is a leading provider of environmental services and solutions, operating primarily in the United States, Canada, Mexico, and Puerto Rico. The company operates through two reportable segments: Technical Services (waste treatment, disposal, and logistics) and Site Services (industrial maintenance, remediation, and emergency response). This report covers the quarterly period ended June 30, 2006, and the six-month period ended on that date.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 13.3% year-over-year, driven by a 13.9% increase in Technical Services (due to higher waste volumes and transportation business) and a 11.9% increase in Site Services (due to large project work and higher oil/metal pricing).
• Profitability: Net income increased 16.1% to $14.2 million. However, Diluted EPS decreased from $0.71 to $0.69 due to an increase in the weighted average shares outstanding and the adoption of SFAS No. 123(R) for stock-based compensation.
• Debt Reduction: On January 12, 2006, the company redeemed $52.5 million of Senior Secured Notes. This resulted in an $8.3 million "Loss on early extinguishment of debt" but significantly reduced interest expense (down 50% year-over-year).
• Cash Flow: Operating cash flow improved dramatically to $30.4 million from $9.0 million in the prior year, aided by working capital management and non-cash adjustments.
• Accounting Changes: The company adopted SFAS No. 123(R) on January 1, 2006, recognizing stock-based compensation expense of $1.6 million for the six-month period, which reduced reported net income.

Guidance, Outlook, and Risks

• Acquisition: On May 3, 2006, the company agreed to acquire Teris L.L.C. for $52.7 million, expected to close in Q3 2006. Financing will come from cash and a term loan.
• Debt Covenants: The company is compliant with its credit agreement. The Leverage Ratio was 0.83 to 1.0 (well below the 2.45 limit), and the Interest Coverage Ratio was 5.97 to 1.0 (above the 2.80 minimum).
• Excess Cash Flow Obligation: Based on $36.0 million of Excess Cash Flow for the twelve months ended June 30, 2006, the company anticipates being required to offer to repurchase Senior Secured Notes within 120 days of the period end.
• Environmental Liabilities: The company holds approximately $172.1 million in environmental liabilities (closure, post-closure, and remedial). Management believes cash flows from operations will be sufficient to fund these over many years, though regulatory changes could alter timing or amounts.
• Legal Proceedings: Significant ongoing litigation includes the Ville Mercier groundwater contamination case (accrued $11.6 million) and various Superfund indemnity obligations related to the 2002 Safety-Kleen acquisition. The company is also defending against citizen suits regarding its Plaquemine, Louisiana facility.

Investor Verification Checklist

• Debt Repurchase Obligation: Verify the calculation of the "Excess Cash Flow" offer required for the Senior Secured Notes and the potential cash outflow in the coming quarter.
• Teris Acquisition: Monitor the closing of the $52.7 million Teris acquisition and its impact on leverage ratios and integration costs.
• Environmental Reserve Accuracy: Review the $172.1 million environmental liability reserve, specifically the $11.6 million Ville Mercier accrual and the $13.7 million Marine Shale reserve, for potential volatility due to regulatory changes.
• Stock-Based Compensation Impact: Assess the ongoing impact of SFAS No. 123(R) on future earnings, noting $5.1 million of unrecognized compensation cost remains to be expensed.
• Foreign Exchange Sensitivity: Evaluate exposure to the Canadian dollar, which strengthened against the U.S. dollar in 2006, resulting in $0.8 million in foreign currency losses for the six-month period.